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What is an IRA?

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All About IRAs

An IRA is an investment account, so instead of an ordinary savings account earning 0.5-2% annual interest, your contributions can be  invested in mutual funds, bonds, or index funds. These accounts are tax-shelters, so you don’t pay taxes on gains, dividends, or interest while your money is growing in the account. IRAs are a great way to save for the future if your employer doesn’t offer a retirement plan (i.e. 401k, 403b, etc). In some cases, you can use an IRA to maximize your savings alongside your existing 401k plan. If you’re curious about weighing the benefits of a 401k vs an IRA, click here.

How much can I save in an IRA?

In 2019, the contribution limit for traditional and roth IRAs, the two most common and accessible IRAs, is $6,000. If you’re over age 50, you can save up to an additional $1,000 as a catch-up contribution. In addition to depositing annual contributions, IRA savers may fund their IRA account with benefits rolled over from their former employer’s retirement plan or another IRA.

Who can open an IRA?

Unlike a 401k plan that has to be opened by your employer, anyone with earned income (or who has a spouse with earned income) can open an IRA. In this case, the term “earned income” means having earnings that are claimed for tax purposes. 

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Traditional IRAs

What is a Traditional IRA?

A Traditional IRA is a retirement savings vehicle that allows you to defer taxes on the earnings and growth of your savings until you actually need it in retirement. If you try to dip into these funds before age 59 ½, the IRS will impose a 10% early distribution tax penalty in addition to taxing the amount of the withdrawal at your current income tax rate. A traditional IRA has a required minimum distribution (RMD) starting at age 70 ½.

What are the benefits of a Traditional IRA?

In a traditional IRA plan, most savers can deduct their contributions from their income in the year they make contributions. You don’t pay taxes on interest or gains while your savings grow. When it is time to withdraw funds for retirement, you’ll pay taxes at your income tax rate. Typically, your income will be less in retirement than while you are working, reducing the amount of taxes you pay overall.

Roth IRAs

What is a Roth IRA?

A Roth IRA is a retirement savings vehicle that, if you meet certain requirements, allows you to withdraw your savings and distributions tax-free. Unlike a traditional IRA, contributions to your retirement plan are not tax deductible, but the earnings on your Roth contributions still grow tax-free.

What are the benefits of a Roth IRA?

Because you’ve already paid taxes on your contributions, you can withdraw them in retirement without tax or penalty. Once you reach age 59 ½ and have had your IRA for at least five years, you can take distributions, including earnings, without paying federal taxes. If you withdraw your funds early, you’ll be subject to a 10% penalty.

Roth IRAs do not have a minimum distribution requirement–so you’re not forced to take distributions out of your account when you reach a certain age. There’s also no age limit to making contributions. This allows older folks who continue to work into their golden years an opportunity to save in a tax-advantaged vehicle–and potentially pass money to their heirs.

Roth IRA Contribution Limits

The eligibility conditions, and the amounts you can contribute to a Roth IRA are dependent on your tax filing status and modified adjusted gross income (Modified AGI). Below are 2019 Roth IRA income-based contribution limits:

Filing status

Modified AGI
Maximum contribution

Married filing jointly or qualifying widow(er)

Less than $193,000

$6,000 ($7,000 if 50 or older)

$193,000 to $202,999

Contribution is reduced

$203,000 or more

Not eligble

Single, head of household or married filing separately (if you did not live with spouse during the year)

Less than $122,000

$6,000 ($7,000 if 50 or older)

$122,000 to $136,999

Contribution is reduced

$137,000 or more

Not eligible

Married filing separately (if you lived with spouse at any time during the year)

Less than $10,000

Contribution is reduced

$10,000 or more

Not eligible

Traditional vs. Roth

Need a quick guide to understanding the differences between Traditional and Roth IRAs?
The experts at Ubiquity Retirement + Savings have your back.

Traditional IRA

Roth IRA

Income Limit

None. As long as you earn income, you can contribute

$137,000 for single filers

(the rules get complicated for the married/head of households)

Contribution Limit

$6,000 a year ($7,000 if you’re 50 or older)

$6,000 a year ($7,000 if you’re 50 or older)

Age Limit

70 ½

None, as long as you’re still working

Age Requirement for Penalty-Free Withdrawals

59 ½ (unless you qualify for one of the IRS’s exceptions)

59 ½ (unless you qualify for one of the IRS’s exceptions), and your account is at least 5 years old

Required Minimum Distribution

Yes, beginning at age 70 ½

If you are the original owner of the IRA, none.

Taxes on Growth

You don’t pay taxes on capital gains, dividends, or interest while your money’s growing (before you start withdrawals).

You don’t pay taxes on capital gains, dividends, or interest while your money’s growing (before you start withdrawals).

Taxes on Contributions

It depends on your coverage in a workplace retirement plan and your Modified AGI2.

Yes, contributions are made on an after-tax basis

Taxes on Withdrawals

Yes

No; qualified distributions can be withdrawn tax-free

© 2019 Ubiquity Retirement + Savings
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44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

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© 2019 Ubiquity Retirement + Savings
Privacy Policy
44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

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